Diplomat Pharmacy issues dire warning as its losses grow

Management's assessment expresses "substantial doubt" in "ability to continue as a going concern"

Brian Griffin

Flint-based Diplomat Pharmacy Inc. reported Tuesday a third-quarter net loss of $177 million and said it has "substantial doubt" it can stay afloat without "strategic alternatives" — potentially a sale of the company — by the end of the year.

The specialty pharmaceutical services provider is in "advanced discussions" regarding "interest in both the whole company and its businesses," according to a written statement from Chairman and CEO Brian Griffin.

Release of the dismal financial results and the "going concern" warning prompted Diplomat's (NYSE: DPLO) stock to lose 50 percent of its value Tuesday. It closed at a record low of $3.10 Tuesday, down sharply from $6.20 at Monday's close.

In Tuesday's financial report, the company gave itself a deadline of Dec. 31 to implement "mitigating plans." Without the plans, the company would violate terms with its creditors and give lenders the right to shut off financing and foreclose on the company's assets, the earnings report said.

Diplomat stopped short of saying it having a definite path to prevent that from happening.

"Our mitigation plans are reliant on third parties and beyond our control, and therefore accounting rules do not permit us to conclude that it is probable that any of these alternatives will be effectively implemented prior to any such covenant violation," according to the company.

Diplomat adjusted its full-year earnings outlook to include a bigger loss. The company said it expects its net loss will total between $368 million and $361 million, compared to a previous estimate of between $201 million and $191 million. Diluted loss per share is expected to be between $4.91 and $4.81 — about 45 percent higher than the previous range.

Part of the reason for the adjustment is the company losing the business of "one if its largest payers" effective Nov. 28. The contract was worth about $700 million in revenue, the company said.

Diplomat has been battered by other lost contracts and a glut of competition in the consolidating pharmacy benefit manager business, where giants such as Walgreens and CVS sweep up market share. To stem losses, the company has been exploring "strategic alternatives" and "potential transactions" to improve operations and capital spending.

The company's net debt as of Sept. 30 was $562.9 million, down from $584.8 million in June. Its third-quarter revenue totaled $1.3 billion, compared to $1.37 billion the same time last year.

For full-year 2019, Diplomat is predicting more revenue than previously estimated. Total revenue is expected to be between $4.9 billion and $5.1 billion, compared with the previous range of $4.7 billion to $5 billion.

Diplomat sold a chunk of one of its subsidiaries last month to pay down its debt. Terms of the deal to sell certain assets of Envoy Health Management LLC to Pennsylvania-based Diligent Health Solutions LLC were not disclosed.

"…We are focused on executing our strategy and continuing to put measures in place to help mitigate the impact of industry headwinds," Griffin said in Tuesday's earnings report.